In This Article:
Today we are going to look at Intertek Group plc (LON:ITRK) to see whether it might be an attractive investment prospect. To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.
First up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. And finally, we’ll look at how its current liabilities are impacting its ROCE.
Understanding Return On Capital Employed (ROCE)
ROCE measures the amount of pre-tax profits a company can generate from the capital employed in its business. Generally speaking a higher ROCE is better. Overall, it is a valuable metric that has its flaws. Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.
How Do You Calculate Return On Capital Employed?
The formula for calculating the return on capital employed is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
Or for Intertek Group:
0.28 = UK£452m ÷ (UK£2.1b – UK£535m) (Based on the trailing twelve months to June 2018.)
Therefore, Intertek Group has an ROCE of 28%.
See our latest analysis for Intertek Group
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Is Intertek Group’s ROCE Good?
ROCE can be useful when making comparisons, such as between similar companies. In our analysis, Intertek Group’s ROCE is meaningfully higher than the 22% average in the Professional Services industry. I think that’s good to see, since it implies the company is better than other companies at making the most of its capital. Regardless of the industry comparison, in absolute terms, Intertek Group’s ROCE currently appears to be excellent.
As we can see, Intertek Group currently has an ROCE of 28% compared to its ROCE 3 years ago, which was 19%. This makes us wonder if the company is improving.
It is important to remember that ROCE shows past performance, and is not necessarily predictive. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. This is because ROCE only looks at one year, instead of considering returns across a whole cycle. Future performance is what matters, and you can see analyst predictions in our free report on analyst forecasts for the company.